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Contract Formation and Classification

    A contract is, first of all, an agreement. It is a mainifestation of the mutual assent of the parties. The mutual assent, or the agreement, is typically reached when one part ( the offeror) makes an offer to another party ( the offeree ) who accepts the offer. Offer and acceptance are the acts by which the parties come to a “meeting of the minds”.

    When there is no meeting of the minds, there is no vaild contract. To determine whether the minds have met, both offer and acceptance must be analyzed. The offeror may have had something in mind quite different from that of the offeree. Notwithstanding, the intention of the parties is determined not by what they think, but by their outward conduct; that is, by what each leads the other reasonably to believe.

    For an agreement to be a vaild contract, the contracting parties must have legal capacity to enter into transactions. A party lacks capacity to contract if he is incapable of a full understanding of his rights and the nature, purpose and legal effects of the contract. Capacity-to-contract issues generally involve minors, mental incompetents, intoxicated persons and drug addicts.

    A contract is also a bargain. This means that a contractual promise is never made as a gift and must be based on consideration. A contract without consideration is not binding and does not furnish a claim.

    The doctrine of consideration requires that the promisor receive a benefit for the promise he makes and the promisee, while gaining the benefit of the promise, relinquish something or incur a detriment. Consideration may exist in the form of performance or in a counterpromise.

    Two well-established general principles are very helpful in determining whether consideration really exists. One is that what matters is the legal sufficiency of the consideration in contrast to its economic adequacy. Another is that past performance cannot be consideration for present promise.

    The above discussion shows that a contract may be void or voidable if 1) one of the parties or both lack capacity; 2) the necessary meeting of the minds does not exist, or the consent of one of the parties was brought about by fraud, misrepresentation, or by duress, or if the agreement is founded on mistake; or 3) the contractual promise is not supported by consideraton. Another important factor that may affect the validity of a contract is illegality. If a contract is made for an illegal purpose, or if its content is tainted by illegality, it does not exist in the eye of law. Closely related to illegality is the concept of unconscionability. If a contract is made against public policy, it is often said to be unconscionable and therefore unenforceable.

    The form of a contract may also affect its validity. Apart from special contracts ( such as negotiable instruments and insurance contracts ) which must be in writing, contracts which fall under the old English Statutes of Frauds also need a signed writing. This applies to, among others, 1) promises to pay the debts of a signed writing. This applies to, among others, 1) promises to pay the debts of another; 2) contracts concerning real property; 3) promises in contracts not to be performed within one year; and 4) contracts of sale exceeding $500. If contractual promises fall under the statutes of frauds, suit will lie only if there exists a writing by the party who resists performance which documents his contractual obligation.

    In addition to being valid, void, voidable, and unenforceable, contracts may be classified in various other ways. A contract is either bilateral ( a promise for a counterpromise ) or unilateral ( apromise for performance ). A contract may be referred to as executed ( one fully performed by the contracting parties ) or executory ( one that is yet to be performed ). A contract may also be express, implied-in-fact, or implied-in-law. An express contract occurs when the parties state their agreement orally or in writing. When the parties manifest their agreement by conduct rather than by words, it is said to be implied-in-fact. Implied-in-law contracts are quasi-contracts, because the obligation is created by law in absence of agreement, to prevent unjust enrichment.

    The bulk of American contract law is judge-made case law. Special areas of contract law such as labor law and labor law and insurance law have been partially codified, but even in these areas the primary source of applicable legal principles are found in the written opinions of the courts.

    The Uniform Commercial Code brings some contracts under its provisions. However, the scope of its applicability is limited. For our purpose it is sufficient to know that sales contracts are governed by the Code. Most other contracts ( general business, real property, employment, construction and the like ) skill follow the common law rules as developed in cases.

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